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Thursday, October 2, 2008

Formula One and the credit crunch

The trouble in the global economy has hit many institutions and businesses. Formula One is not immune to the financial down turn in the world. Here is an interesting article by Alan Baldwin of the International Herald Tribune (Global Edition of the New York Times) regarding Formula One and the credit crunch. For the sake of full information, below is the full article:

Formula One looked in fine fettle at Sunday's stunning night-time grand prix in Singapore but the worry lines are always more apparent in the cold light of day. Money is the lifeblood of the billion-dollar sport and, with the credit crunch biting deep into the global economy, those involved know they cannot continue to spend like there is no tomorrow. "Formula One is in rude good health...and I think that it can stay in great health provided that we take action," Williams team chief executive Adam Parr told Reuters. "Formula One is marketing itself very well in terms of establishing new races in key areas but we need to do more. "Costs have grown exponentially in the last 10 years and it's time to put an end to that."

International Automobile Federation (FIA) president Max Mosley warned in July that Formula One was "becoming unsustainable" and the global economic climate has only deteriorated since then. Honda-backed Super Aguri folded in May, leaving Formula One with 10 teams and no prospect of anyone new coming in. Some insiders fear others could also head for the exit unless changes are made. Toro Rosso, co-owned by Red Bull energy drink billionaire Dietrich Mateschitz, have a guaranteed budget for 2009 but their future remains uncertain beyond that. Red Bull Technology currently design the cars for both Toro Rosso and Red Bull Racing but in 2010 each team will be required to design and make their own, a huge burden for the smaller, Italy-based outfit. "I would struggle to carry on alone," Toro Rosso co-owner Gerhard Berger told Italy's Gazzetta dello Sport last month. "I need the backing of a car manufacturer. Which isn't there."

DWINDLING SALESRed Bull use their two teams to promote and sell their product while Force India are bankrolled by aviation and drinks billionaire Vijay Mallya, who says he is in for the long haul. Williams, the only team without a manufacturer or billionaire behind them, reported losses of 21.4 million pounds for 2007 on Tuesday but said they were well-funded for the future. In a sport where sponsorship contracts are generally negotiated to run for three and sometimes five years, and spaced out to ensure they do not all expire at once, the former champions can expect to weather the immediate storm.

However big-spending manufacturer teams may be more vulnerable to the parent company's board looking at the bottom line and deciding enough is enough. "It's a lot of money that can be addressed with one swish of the red pen," said Parr. BMW, Fiat (Ferrari), Honda, Mercedes (McLaren), Renault and Toyota all either wholly or part own teams -- some with budgets of more than 226 million pounds a year -- against a backdrop of dwindling sales and sinking share prices. Some, such as Toyota, have pumped billions of dollars into the sport with little to show for their investment. Honda, whose car promotes environmental awareness rather than any major external sponsor, have also spent hugely.

MORE PRESSURE"Those teams that are very dependent on car manufacturers for funding and don't have commercial sponsors might be under more pressure," former Benetton and BAR team boss David Richards told Reuters. But there is unlikely to be any knee-jerk reaction. It (withdrawal) is such a high-profile decision to make." To try to bring down the costs, the teams have formed an association to work with the FIA and commercial rights holders. "I think it is absolutely urgent," Parr said of the need for cost-cutting. "Whatever measures we take must be in place for 2010. Anything beyond that is too late, both the teams and the FIA recognise that. "The car manufacturers could halve their spending in Formula One tomorrow," he added. "I know that because, guess what, I know what we are spending. Why does anyone have to spend more than Williams spend on going racing? If the board of another team says we want to stay in F1 because it's a fantastic platform for our business but we are only prepared to spend what Williams spends -- is that the end of the world? Some of these teams could save 100 or 200 million euros by doing that."

On the plus side, the money is pouring in from new venues such as Singapore and Abu Dhabi, which will make its debut in 2009, and there is no immediate sign of sponsors running for cover."I think we had 900 guests over the Singapore weekend. Our sponsors were enormously active," said Parr, who added that three or four partners had renewed or extended contracts in the last few weeks. "Businesses still have to achieve their key objective and Formula One is still a unique platform for doing that," he said.

"For a company worth let's say 40 billion pounds, to invest 20 million a year in a Formula One partnership is not a major undertaking. It's significant but not major."